Fed Signals Policy Shift: The Federal Reserve opted to maintain interest rates, with Chair Jerome Powell signaling a probable end to the historical tightening of monetary policy. Powell highlighted the unexpected drop in inflation, suggesting a potential shift towards considering cuts in borrowing costs.
During a press conference, Powell emphasized a change in economic projections, indicating that rate hikes were not the primary expectation anymore. Chief economist Diane Swonk expressed a decisive sentiment, proclaiming, “The Fed is done!” She hinted at a possible future scenario where economic data prompts rate cuts.
This shift was evident in the outlook, as 17 of 19 Fed policymakers foresaw lower rates by the end of 2024, and none predicted an increase. Powell acknowledged the delicate balance the Fed must strike between stable prices and maximum employment, emphasizing the risk of “overdoing it” and causing an unnecessary economic slowdown.
The central bank’s focus on achieving a “soft landing” became apparent, aiming for inflation to return to the 2% target in a gradually slowing economy with low unemployment. Powell cautiously mentioned the need to determine when it becomes appropriate to dial back, indicating the ongoing debate within the Fed.
Also Read: Currency Markets Await Feds Dance: Will Powells Moves Align with Market Expectations?
The financial markets reacted positively, with U.S. stocks surging, the dollar dropping, and Treasury yields falling. Traders predicted a potential start to rate cuts in March, reflecting a significant departure from the Fed’s earlier stance.
Inflation projections, especially the headline personal consumption expenditures, indicated a downward trend, aligning closely with the Fed’s 2% target. The unemployment rate was expected to rise modestly, while economic growth was projected to slow.
Powell’s acknowledgment of the current economic scenario as “so far, so good” reflected a cautious optimism. The bond market responded by driving down the yield on the 2-year Treasury note, signaling a market interpretation of Powell’s message as the potential beginning of a Fed easing cycle. Overall, the Fed’s decision and Powell’s tone marked a notable shift, suggesting a more accommodative stance in response to evolving economic conditions.
Our Reader’s Queries
How often does the Fed announce rate changes?
The Federal Reserve establishes a “target” rate and may convene additional meetings beyond their standard eight-meeting schedule in response to economic instability.
Will Fed lower interest rates 2024?
In December, the FOMC gave the green light to a plan that involves reducing interest rates three times in 2024. Each cut is expected to be 0.25%. The plan also includes additional rate cuts in 2025 and 2026, which would bring the federal funds rate down even further.
How does the Fed shift the money supply?
To adjust the economy, the money supply can be altered by exchanging short-term government debt with the private sector through open-market operations. This straightforward approach is commonly used.
What is the Federal Reserve changing?
In response to a sudden inflation surge, the Fed swiftly changed course and raised rates throughout 2022 and into 2023. Additionally, the Fed reversed its previous policy of quantitative easing (QE), which involved purchasing Treasury and mortgage-backed securities to increase capital market liquidity.